Could cartel activity legislation drive cartels underground?

The business world thrives on a bit of healthy competition, but companies who decide to take the market into their own hands by using cartel conduct will find themselves in very hot water. According to the amendment to the Competition Act that came into effect on 1 May 2016, the directors or managers who are aware of the cartel conduct that their company is involved in, could face imprisonment.

However, the provision of the amendment that would lead to a director or manager of the company involved in cartel conduct being liable for a sentence of up to 10 years and/or or a fine of up to R500,000, has not yet come into effect.

“While the amendment to the Competition Act is a welcome development in trying to curb cartel conduct, by individualising criminal sanctions, it appears to be a duplication of enforcement and borders on redundancy. We believe the Prevention and Combating of Corrupt Activities Act may provide for better remedies against cartel conduct as it imposes harsher sanctions and penalties, says Maphanga Maseko, Associate in Competition Law at TGR Attorneys

The Prevention and Combating of Corrupt Activities Act appears to treat collusive tendering as corruption and provides for sentences ranging from 5 years to life imprisonment, depending on the court that presides over the prosecution. “In addition, a court can make an order that the person or company found guilty of corruption be blacklisted by the National Treasury and thus be prevented from doing business with the state and/or that the current contracts with the state be terminated. National Treasury can blacklist the guilty director, manager or company concerned for a period of up to 10 years,” adds Maseko.

Furthermore, Maseko expressed concern that the amendment could also scupper the effectiveness of the Corporate Leniency Policy (the “CLP”) which is the cornerstone of competition policy and assists the Competition Commission to uncover cartel conduct that would otherwise have gone unnoticed.

The CLP encourages companies involved in cartel activity to come clean about such conduct and exposes those other companies involved. A company is given immunity from prosecution in exchange for giving information and/or evidence of the cartel to the Competition Commission. The evidence is used to prosecute the other companies involved in the cartel.

“The CLP has been an overwhelming success and has led to a number of cartels being uncovered and billions of rand in fines being paid by the guilty companies. Regrettably, the effect of the amendment may undermine the success of the CLP as it may lead to the managers or the directors concerned not informing their employers of their involvement in the cartel for fear of criminal liability. This could result in less cartels being uncovered or going underground.

“It seems the amendment may make the tasks of uncovering cartels much harder in the future,” concludes Maseko.

Cartel conduct is the process by which businesses agree to act together instead of competing against one another. An agreement is designed to drive up profits, whilst maintaining the illusion of competition through practices including price fixing, dividing of markets and collusive tendering. By controlling the market, cartels can put other businesses in jeopardy as well as stifling innovation. A company that is found guilty of committing a prohibited practice may be liable for an administrative penalty of up to 10% of its affected turnover in South Africa for the year preceding the cartel conduct.